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California Outlook Revised To Positive On Budget Proposal's Focus On Paying Off Debt And Building Reserves

Publication date: 14-Jan-2014 14:18:53 EST

SAN FRANCISCO (Standard & Poor's) Jan. 14, 2014--Standard & Poor's Ratings 
Services revised the outlook on all its ratings for California to positive 
from stable. In addition, we affirmed our 'A' long-term ratings and underlying 
ratings (SPURs) on California's $75.4 billion of general obligation (GO) debt. 
Simultaneously, we affirmed our 'A-' long-term ratings and SPURs on the 
state's $10.3 billion of appropriation-backed debt.

"The outlook revisions reflect our view that Governor Jerry Brown's fiscal 
2015 budget recommendation would build upon the improvements made to the 
state's finances in recent years," said Standard & Poor's credit analyst 
Gabriel Petek. "In particular, the plan's emphasis on debt repayment and 
appropriating funds to its reserve could be helpful in strengthening the 
state's fiscal position, in our view," added Mr. Petek. 

If a budget with such provisions were enacted, we believe that, within the 
two-year outlook horizon, the state's finances could be consistent with a 
higher rating, most likely of one notch. But the proposal also initiates 
reforms to some of what constrains the state's credit quality structurally. In 
so doing, the proposal opens to the door to longer-term and more significant 
rating improvement. Specifically, it offers a revamped approach to funding a 
rainy day reserve designed to counteract the effects of the state's revenue 
volatility. The budget proposal also highlights that the state teachers' 
retirement system (CalSTRS) is in need of a long-term funding strategy. And 
although the governor's proposal stops short of defining a plan for that, 
citing the need for one in the budget recommendation marks an important first 
step, in our view. But risks to the direction of the state's credit quality 

Related Criteria
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Complete ratings information is available to subscribers of RatingsDirect at and at All ratings affected by 
this rating action can be found on Standard & Poor's public Web site at Use the Ratings search box located in the left 
Primary Credit Analyst:Gabriel J Petek, CFA, San Francisco (1) 415-371-5042;
Secondary Contact:David G Hitchcock, New York (1) 212-438-2022;

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